Life insurance an overlooked asset in economic uncertainty: CCO

Accessing the cash value of a life insurance is not often the first option investors think of when they look for liquid assets.  

But Andrea Frossard suggests that this strategy has been misguidedly overlooked, particularly amid volatile market conditions and a long-stagnant Canadian economy. 

For individuals who have cash values within their life insurance policies, Frossard says they can either withdraw some assets, pay off premiums or take a loan against the cash value. She says that the heightened market uncertainty and difficult economic outlook for Canadians makes these options increasingly appealing, as individuals can increase their liquid assets without pulling from other pots. 

“Not all insurance products have cash values, but many do,” said Frossard, CCO at Foresters Financial. “And what you can do with those cash values is you can either choose to use them to pay your premiums, for example, or you could take a loan against them, or you can actually withdraw some as well.” 

But the process of pulling cash values out of policies should be done carefully with the help of a financial advisor, according to Frossard. She says advisors should be particularly conscious of the potential taxation consequences of withdrawals and loans against cash values, emphasizing the case-to-case basis this process requires. 

“There could be some tax consequences, and that will vary by individual, but there certainly can be withdrawals and loans may be partially taxable if they exceed the policies adjusted cost basis,” she said. “Really understand all of your portfolio, and by that I mean all of the assets that you have. Also consider your liabilities, your income, etc, and make sure that you know this does make sense for you and your particular circumstances.” 

She also warns that those looking to take advantage of their life insurance assets should be aware of the potential pitfalls surrounding death benefits. Taking a loan against your cash values can be beneficial in the short term, but she says this loan must be accompanied with a realistic plan to pay it off, as a death would pass on the loan and its interest to the individual’s next of kin. 

“If you take a loan and the proceeds of the loan that haven't been paid off, if you pass away, it would be deducted from the death benefit, as well as any interest that would have accumulated,” she said. 

Continuous growth is a particular advantage of the cash value in life insurance policies according to Frossard, who points out that the same cannot currently be said about markets.  

“One of the things with life insurance policies that have cash values is there's a guaranteed cash value, and it grows year over year. If you're in a participating account, you can also have dividends that can further increase that,” she said. “The nice thing about that is, in these uncertain times, those values are not going to be moving all over the place like the markets are moving these days.” 

Frossard also points to the convenience of putting a loan against a policy, as there is no approval process involved in the procedure.  

“Another factor is just convenience, policy loans are often quicker,” she said. “You don't have to do credit checks, there isn't an approval process. It's your policy, you have access to those cash values if you choose to do so.” 

Life insurance assets are often used for reinvestment, travel plans and tuition for children among other ways individuals can utilize their cash values. The cash value aspect of life insurance policies is often forgotten by policy users, according to Frossard. 

“People tend to be purchasing life insurance to protect their loved ones after they're gone, and they don't necessarily think about the fact that there is that other piece of the insurance policy that also exists that they can access,” she said. “It's important to remind people that they may actually have something that they can easily access as an asset to help through some of these challenging times.” 

With an unprecedented generational wealth transfer underway, Frossard says investors should be speaking with advisors about their weighting of liquid assets and non-liquid assets in their estate, pointing to the taxation consequences of non-liquid assets such as real estate and businesses. She also says there is an opportunity for those inheriting an estate to understand the usages of life insurance for their own wealth plans. 

“As baby boomers pass on wealth, millennials and Gen Xers become the new stewards,” she said. “And it's crucial for advisors to help older clients structure their estates wisely, while also engaging the younger beneficiaries early with education and planning, understanding the life insurance products that are available to them to help build their own legacy.”